The unintended consequence of the use of wording within the qualification section of the Building Safety Act 2022 meant that leases which underwent the extension process were excluded from that qualification; this is something we reported on within following article: http://lease-advice-bureau.co.uk/does-the-building-safety-act-2022-impact-lease-extensions/
We are pleased to report that this error is soon to be addressed in the form of an amendment to the Levelling-up and Regeneration Bill 2023. Amendment #243 of this states that “A qualifying lease varied, or subject to any surrender and regrant, remains a qualifying lease”, and that this will take effect retrospectively.
This is good news for those who live in high-rise buildings and were quite rightly holding off on extending their lease due to the concern of severing oneself from the receiving those protections afforded by the Building Safety Act, principally being safeguarded against costs that should be levied against the original developer for inherent building defects, as those covered by that legislation.
A shared-ownership lease is a particular type of ownership whereby the Tenant has bought a share of the property (house or flat) and pay rent on the part of the property that is still retained by their Landlord (typically a Housing Association).
The Tenant has a right to purchase additional shares from their Landlord which is a process known as “staircasing” which they can do until they own 100% of the equity and the property is no longer considered shared-ownership, but a regular leasehold.
Although long leaseholders can qualify for a lease extension under the Leasehold Reform Housing and Urban Development Act 1993 (“the 1993 Act”), traditionally it was assumed that these shared-ownership Tenants who have not staircased to 100% do not qualify for a lease due to the contents of the qualification provision in the lease extension law, which defines what type of leases the right to extend applies to. Which under Section 7(1)(d) of the 1993 Act states the following:-
“a shared ownership lease, whether granted in pursuance of that Part of that Act or otherwise, where the tenant’s total share is 100 per cent”
As such, it was widely considered that a shared-ownership Tenant could only extend once they had staircased to 100%.
This understanding has been questioned in recent times due to a court case that concerns the Right to Manage (RTM), which is a different leasehold entitlement, but shares some commonality with lease extension legislation.
This RTM case was entitled Avon Ground Rents Ltd v Canary Gateway (Block A) RTM Company Ltd concerned the question of whether shared ownership tenants who had not staircased to 100% could be regarded as Qualifying Tenants who are able to exercise the Right to Manage.
It was held at the Upper Tribunal that they did qualify as those Tenants fell within a separate sub-heading which stated that their lease merely needed to be “granted for a term of years certain exceeding 21 years, whether or not it is (or may become) terminable before the end of that term by notice given by or to the tenant, by re-entry or forfeiture or otherwise” (s. 76(2)(a) of the Leasehold Reform and Commonhold Act 2002 “the 2002 Act”).
This case was appealed earlier this year, and the Court of Appeal upheld the decision. That decision can be read here: https://caselaw.nationalarchives.gov.uk/ewca/civ/2023/616
The section which concerns which leases qualify for Lease extensions (Section 7(1) of the 1993 Act) mirrors that within RTM law (Section 76(2) of the 2002 Act) and for this reason it has been speculated that the findings in the RTM case should also apply to Lease Extension (and Enfranchisement) law. Indeed, the judgment itself refers to the 1993 Act cases within much of the decision.
It has been speculated that the Court of Appeal decision will itself be appealed in the Supreme Court. If so, there remains a chance that the decision could be overturned. Moreoever it is worth mentioning that the decision concerning RTM law does not categorically mean that the qualification applies to Lease Extensions; although it is a more than reasonable supposition.
As for the big question: Should shared-ownership leaseholders (who have not staircased to 100%) seek to extend under the 1993 Act?
In true lawyer fashion, this must be a “perhaps”. In doing so, one must be prepared for the potential resistance. They much weigh up their financial considerations of a diminishing lease against the potential consequences should the Landlord wish to challenge on this point.
Futhermore, in the event that the aforementioned decision is overturned, we should consider what impact this may have over a completed lease extension.
The legal effect of such Court decisions impact retrospectively; in other words, a Court’s decision on interpretation of statute merely clarifies what should been the legal understanding all along. An interesting question is therefore would such new interpretation give rise to a right of rescission (ending the agreement) for a lease granted under a disqualifying circumstances. We would have to turn to remedies that apply to Contract Law for breaches of condition and warranty; the former giving rise to such a remedy.
Although this goes beyond the scope of this article, I would hazard a speculation that as per our understanding of conveyancing terms the difference may only give rise to a breach of warranty and would therefore not give risk to rescission (termination of the lease extension deed), however that perhaps a question for another time. Ultimately the Court of Appeal decision does for the time does provide relatively strong support in favour of claiming entitlement to a statutory lease extension.
A residential long lease would most certainly provide for a “Ground Rent”, which is an annual sum pay to the Landlord. Typically these sums are not particularly high, they average at about £100 to £300 per year, and generally go up periodically at a similar rate to inflation throughout the duration of the term of the Lease. Legally speaking, these Ground Rents are purely profit sums, in other words the Leaseholder is not receiving any particular service in exchange for paying this sum. It is simply part of the bargain of the Lease contract as at the date it was first granted.
However, what at first glance may seem innocuous can still cause some considerable issues for Leaseholders. We have seen from a previous article that the government as sought to address this somewhat by preventing any new leases from containing any ground rent provisions. However, this does not address current leases that can contain high ground rents.
One such issue are “doubling ground rents”. These are leases originally granted by developers that have rents that double every 10 or so years. When an exponential calculation is employed, those rents reach astronomical levels, rendering those leases effectively time-bombs and unmarketable. There are some developers, such as Taylor Wimpey that have voluntarily agreed to address such issues, by agreeing to vary such leases so that the clauses no longer double but are calculated according to inflation, by referencing the Retail Price Index (RPI).
However, this is not the only potential problem.
In recent times, mortgage lenders, and therefore purchasers have become increasingly aware of an unintended impact of a provision within the Housing Act 1988.
The provision in question concerns Assured Tenancies, which most would be familiar as the typical 12 month tenancy agreements used by leaseholder landlords throughout the county.
If the lease qualifies as an assured tenancy (AT) and there is unpaid ground rent, the Landlord can apply to terminate the lease and the court must end the lease and give possession back to the landlord, which the Landlord does so under Ground 8 in Schedule 2 of that Act.
The landlord does not have to compensate the tenant (i.e., the leaseholder) or the lender.
How does this impact long leaseholds?
Due to increasing ground rents, some long leases now qualify as ATs. A long lease can qualify as an AT if:
the rent exceeds £250 per year, or £1,000 per year in Greater London
• it is occupied by the leaseholder as their principal home and
• the leaseholder is an individual (i.e., the Act does not apply to limited companies).
Ground 8 applies in several circumstances, but of particular relevance to long leases is the provision that:
• if at least one quarter’s rent is more than three months in arrears, if the rent is payable quarterly (which it will be in most long leases) and
• the landlord makes an application to terminate the lease under Ground 8
This means, even for small sums of rent arrears, leaseholders could become subject to a mandatory possession order if they default on payment of ground rent.
There is no maximum lease term to qualify as an AT under HA 1988, provided that the lease was entered into after the Act came into force.
If the lease does not include an exclusion preventing the operation of the Act, a mortgage lender may require a deed of variation to ensure the Landlord does not use the provisions.
Some mortgage lenders may accept indemnity insurance.
What can the leaseholder do?
A Landlord can voluntarily agree to carry out a variation of the Lease. Provided does agree, he will likely want some compensation for the loss of rent. Furthermore the process itself will require the Leaseholder to engage a Solicitor to represent them in carrying out the extension, and the Landlord will also no doubt have legal representation whose costs the leaseholder will also be expected to indemnify.
But if the Landlord is not willing to agree, or some deal is not viable, then the only recourse available to the Leaseholder is to carry out a statutory lease extension. One of the side-effects of extending the lease in this way, is that the ground rent shall be reduced to a peppercorn (nil).
In conclusion, it is best that leaseholders and conveyancers alike be familiar with the impact of Ground Rents provided under the terms of a lease. If you require further information on the subject, do not hesitate to get in touch.
Any new residential leases created after 30th June 2022 are subject to the provisions of this legislation. The legislation prohibits leases granted after this date from carrying a ground rent aside from a ‘peppercorn’, which means Nil. Apart from new build leases created by Developers, this legislation also impacts lease extensions, since these are “new leases”, and therefore prohibits lease extensions from carrying provisions increasing the ground rent beyond those that are were expressed within the current lease.
In other words, a new lease extension may continue to provide for the same ground rent as contained in the current lease, but from the commencement of the extended period, the rent must become a peppercorn (nil).
A Landlord that seeks to collect illegitimate ground rent from such a qualifying lease will be liable for penalties under the provisions of the Ground Rent Act 2022.
The advent of this legislation will certain have an impact on the number of “informal” lease extensions granted by Landlords, considering one of their main motivations for granting such lease extensions was to increase the ground rents due under the lease, thereby increasing the value of the freehold. Which is something that could never be done under the statutory regime method which requires that ground rent must be reduced to a peppercorn. As such, Landlords no longer have a vested interest in being pro-active in the grant of lease extensions, and the prediction is that many will simply await the receipt of a formal claim notice (known as a “section 42” notice) from a leaseholder before cooperating with the grant of the extension. This Act is the first stage in a list of proposed leasehold reform by the government. It remains to be seen to what extent other proposals reach the statute books, but we eagerly await new developments.
There are many leaseholders who bought new build leasehold properties from developers, in which those leases contained onerous ground rent provisions, often doubling, say, every 10 years. Due to the length of such leases, such a provision can quickly reach astronomical sums potentially rendering the asset at risk of eventual negative equity. This understandably impacted the marketability of such leases and such purchasers were having tremendous difficulty selling such flats.
In September 2020, the Competition and Markets Authority (CMA) launched enforcement action against 4 leading housing developers it believes may have broken consumer protection law in relation to leasehold homes. Taylor Wimpey, for using possibly unfair contract terms, and Barratt Developments and Persimmon Homes over the possible mis-selling of leasehold homes. This was an indicator of what was soon to come in the way of the Ground Rent Act 2022 curtailing such situations from occurring. But this impacts leases granted after June 2022. What about those who already have doubling ground rents, harming the marketability of the those leases on the open market.
If your Landlord is Taylor Wimpey, there is an easy solution, as the CMA secured formal commitments from the developer, such that they will make good those leases to whomever requests this. In practice, in most cases, this comes in the way of the developer agreeing to pay a sum towards the legal costs of the Leaseholder’s solicitor (typically a flat £750) and will assist in enabling the change to from a doubling ground rent clause to one that adopts a calculation that accounts for inflation (via the retail price index -RPI ) in its calculation for how much ground rent is payable at any time. This is certainly preferable to the onerous doubling ground rents. Although, it is curious as to whether even an RPI ground rent provision conflicts with the Ground Rent Act 2022. This writer believes that it does not, considering it will not be considered a ‘new lease’ that would engage the provisions of the legislation.
What about those others who do not have such leases. Until such time that the government may address this with blanket reform, unless the Landlord voluntarily agrees to vary the ground rent provision, the only option that remains is for the leaseholder to apply for a new lease (a lease extension) under the provisions of the Leasehold Reform Housing and Urban Development Act 1993 (the 1993 Act), or in the cases of Leasehold Houses, the Leasehold Reform Act 1967. In the case of the 1993 Act, a side effect of obtaining a statutory lease extension, is that the ground rent will be reduced to a peppercorn (nil), while certainly the current ground rent is a relevant factor in the calculation of the ‘Premium’ payable to the Landlord in exchange for the Lease Extension, it is not a pure capitalisation, and will most certainly resolve an otherwise helpless situation. We would advise speaking to a Surveyor specialising in lease reform valuations. Contact us for more information.